China: Hard, Soft, Or Just Warming Up?

David Wismer
, ContributorI look at what the newsmakers are saying and how it's being covered.Opinions expressed by Forbes Contributors are their own.

There has been no shortage of news concerning China recently, everything from the heated exchange in the last Presidential Debate between the President and Governor Romney to the Japan/China territorial conflict to the recent strengthening of the yuan to Apple’s Foxconn woes.

But perhaps no China topic receives as much attention as the “hard versus soft” landing issue, and last night’s numbers on GDP and other elements of China growth has the media abuzz once again. This takes on particular importance with the backdrop of the “regime change”.

Such a change is a generational shift and generally occurs once a decade, with the BBC reporting that “it could be the start of an unnerving period of flux, which combined with the U.S. election, could present new leaders who have very different attitudes from the current leaders.” (Others have a slightly different take, seeing a very tightly controlled economy not running too hot or too cold into the new leadership change, with few extremes to either side of the ledger.)

But we digress. Let’s look at the recent figures as reported in a number of sources:

China’s National Bureau of Statistics reported Thursday that GDP slowed to an annual rate of +7.4% in the third quarter, the lowest growth rate since 2009.

This was in line with the FactSet consensus for a rate +7.4% but below the +7.6% rate of growth seen in the prior quarter and marked the seventh consecutive quarter of slowing growth and was the weakest rate seen since 2009.

Industrial Production rose to +9.2%, which was above the consensus for a rate of 9.0% and last month’s 8.9%.

Retail Sales grew by +14.1% on a year-over-year basis, which was above the consensus for +13.2% and above Q2’s rate of +13.5%.

And finally “Fixed Asset Investment” increased by +20.5% on an annual basis, which was above the consensus for a rate of +20.2%.

The question is, how does this fit into the going forward picture in terms of “hard versus soft” landing?

“While our growth forecast for China is substantially below consensus, we do not consider this to be a 'hard landing' scenario," Ramin Toloui, global co-head of emerging markets at PIMCO in late September, as reported by the WSJ. (PIMCO is calling for inflation-adjusted growth of 6.5%-7.0% over the next twelve months).

Mr. Toloui added, "China's government retains numerous policy tools to avert a hard landing, including more aggressive cuts to reserve requirements and interest rates, relaxation of housing-market controls, and if needed, a larger fiscal response."

Mark Williams of Capital Economics was interviewed today on Bloomberg Radio and remarked that the numbers released last night fit in with his view of a “New Normal” for China (borrowing PIMCO's pet phrase), saying markets should not expect a return to 9-10% growth levels any time soon. But Williams also pointed out that with mainland HH incomes still growing steadily versus YAG, market hopes for further aggressive stimulus might be a stretch, at least if the 7%+ growth rate holds steady or improves.